Forty Centuries of Wage and Price Controls

8

Three Nations Between the Wars

NEW ZEALAND

The government of New Zealand experimented quite widely with controls both during and between the two world wars. In July 1918, for example, the government of that country set down regulations for the fixing of prices (and the rationing of supplies) of gasoline. The controls were, however, short-lived and during the period of their enforcement, the supply of motor fuel was very erratic, causing serious shortage at one instant, and severe glut the next.

Milk was another target for New Zealand regulation, the controls starting during World War I. On January 18,1917, the first Order in Council was issued, fixing the price in the Wellington area; in 1918, the Order was revised (with a higher price being enforced) and extended to cover other areas. From 1919, the Wellington City Council itself took over the administration of the milk supply.

We have seen so often that the enforcement of price regulations needs an ever-increasing bureaucracy, administering an ever-increasing set of regulations and enforcing ever-increasing penalties. New Zealand seems to be no exception. But what was the result of these controls? At the fixed price there were never adequate supplies of fresh milk in Wellington, and milk and cream were being turned to more profitable uses than human consumption. In discussing these regulations, William Sutch comments on this period that “It is noteworthy that several Wellington grocers testify that during the latter years of the war the consumption of condensed milk materially increased.”1

Wheat was a similar victim in New Zealand. In 1914, a food commission was set up and as a result of its findings, the maximum price of wheat was fixed at 4s. 9d. per bushel and flour at Ł11 10s. per ton. This regulation was not a success, because the Commission had overlooked the fact that millers selling flour at Łll 10s. were in fact milling at a loss. So the Commission tried again. Prices were raised to 5s. 3d. per bushel for wheat and Ł13 per ton for flour. This regulation was not a success either, because farmers refused to sell and there was no power to compel them to do so. But of course, since people needed wheat, the regulation was easily circumvented. By selling equal quantities of wheat and oats at the same time, it was easy to sell wheat at the regulation price by overcharging for the oats. Or again, wheat was sold at the regulation price and surcharges were made for the sacks, often five times their normal market price.2

Government control of other commodities was similarly unsuccessful; the price of sugar, for instance, rose to twice its uncontrolled price in New Zealand, even though the government took over the industry lock, stock and barrel. The (British) Royal Commission on the Sugar Supply issued its report in June 1921, in which it declared that

The wisdom of the Government in at once taking over in 1914 responsibility for the sugar supply was in our opinion, fully proved in the sequel. But while we recognize that in the special circumstances State management was a necessity, our experience does not lead us to think that State control is a desirable thing in itself in the region of trade in commodities.3

They went on to say, “Our experience shows that State control of trade is not desirable. For successful trading, constant vigilance, quickness of decision and secrecy are wanted, which is difficult to secure in a public department.”

The British have a tradition of understatement.

JAPAN CONTROLS SILK PRICES

At various times since the Great War, Japan attempted to control prices in the silk market. In 1930 the Silk Stabilization and Indemnification Act was passed, probably the most sweeping legislation of this period. The method of price control deployed was the adjustment of supply; the government withheld surplus stocks from the market and made it easier to export silk from the country. Finally, in a move which displays the real senselessness of price controls, the Japanese authorities attempted to limit the production of silk—one of the country’s major exports.

Provincial magistrates, upon whom the burden of the execution of these controls devolved, did not seem to exert much effort to achieve success. They knew that their local constituents would not put up with such high-handed government interference.

The futility of the measure is indicated by the fact that although from March to June 1930, the government took 143,000 boxes of silk out of the market, the price of silk still fell in price from 1,100 yen to 850 yen. So much for price stabilization through the management of supply.4

CONTROLS FAIL IN BRAZIL

The South American continent is not without experience of price regulation. Brazil flirted with coffee price-fixing between 1924 and 1931, and the scheme was retrospectively declared to be an utter flop, and its failure precipitated a change of government in that country.

Various tools were constructed: a control of exports, the regulation of shipments, open market purchases and loans to planters who would keep supplies deposited in government regulatory warehouses. The government sought to keep prices stable by such regulation of supply. But what they found was that government warehouses contained ever-increasing quantities of coffee, while prices were not all that stable. The cost of accumulating and keeping these huge supplies was so high that Brazil had to negotiate large international loans —$50,000,000 in 1926, and another $25,000,000 in 1929, and finally $100,000,000 in 1930. But even these loans were insufficient to enable them to carry the large supplies of coffee which continued to mount up.5

The controls broke down completely in 1931 and huge amounts of coffee had to be destroyed over the following seasons.

Not only large crops, but the effects of price-control itself outflanked the Brazilian government. The relatively high price of Brazilian coffee encouraged coffee demand to seek satisfaction in other countries and as demand dwindled, the government had to impound more and more coffee to keep the price up. Furthermore, the guaranteed price which the government offered encouraged further planting of coffee crops, adding even more to the supply. As Jules Backman comments, “The increase in supplies, as a result of the above-mentioned combination of factors, accompanied by a stationary or decreasing demand could have only one effect so far as the outcome of the scheme was concerned, and that was failure.”6

FOOTNOTES

1. William Ball Sutch, Price Fixing in New Zealand (New York: Columbia University Press, 1932) p. 130.

2. Ibid., Chapter VI, passim.

3. Final Report of the Royal Commission on the Sugar Supply (Lohdon: Her Majesty’s Stationery Office, 1921).

4. Jules Backman, Adventures in Price Fixing (Menasha, Wisconsin: Farrar & Rinehart, 1936) Chapter VI.

5. Ibid., Chapter IV.

6. Ibid., p. 23.